An Early Warning Device for Reversals

Trading trend reversals can be enormously profitable, but also fraught with danger. Online Trading Academy trading instructor, Brandon Wendell, details how he identifies when and where a morning reversal might occur, thus reducing the element of surprise.

In our professional trader courses at Online Trading Academy, we teach our students to stay away from the danger zones of the market. One of these danger zones includes the opening 15-20 minutes of the trading day. There is a saying, “Amateurs open the market and professionals close it.” The opening period (9:30 am EST to approx. 9:50 am EST), is also known as the clearing stage. This is when market makers are eager to clear the backlog of customer orders, which were placed after the market closed or before the open. The unknowing general public comes home after work and watches TV to get their financial news. They get excited about some stock that was talked about and rush to buy it. The market makers are all too happy to push the orders through in the open to capture their spread and commissions.

Those of you who have witnessed this rush will also notice the enormous amount of shares being pushed through the market. The time and sales prints are running through so fast that they are difficult to read. The quotes on the Level 2 bid and ask may also not match up with the prints. Obviously, novice traders should avoid this time if they wish to keep their capital. But when is it safe to trade? Just because the prints slow down and match the quotes doesn’t mean you are in the trend of the day.

I remember that Online Trading Academy used to have clocks, which had certain times painted red, yellow, and green denoting the times of the trading day where is was dangerous, cautionary, and good to trade. If it were only that easy! Remember that we also have the morning reversals, which can create a bit of chop. The first reversal usually occurs between 9:50 and 10:10 am EST. This is when the market makers have cleared out most of the customer orders and are ready to recoup some losses and take profits on their contra-trades. This causes a nice reversal, which may be traded. But we are talking about a 20-minute window here. When is the reversal most likely to occur?

There is a helpful guide, which may identify the turning point for the reversal. Better yet, it is free! I use the Futures vs. Fair Value to gauge at what price the market may turn. First, I identify the prior closing price of the S&P 500 Cash Index.